Daily Update: July 2, 2020

S&P Global’s Daily Update will not publish on Friday, July 3; Monday, July 6, or Tuesday, July 7. We’ll be back on Wednesday, July 8 with our normal schedule.

The benchmark S&P 500 equity index had its best quarter in two decades across April and June—even as the dire outlook for the U.S. economy continues to thwart hopes of a near-term recovery.

“Financing conditions for U.S. corporations have improved even faster than economic data have,” S&P Global Ratings said in its North America Credit Conditions report. “Equity and fixed-income markets are showing exceptional optimism even as new cases of the virus have risen in some areas and the full reopening of the economy is some way off,” as evidenced by the premier U.S. equity index skyrocketing to finish up almost 20% in the past three months.

During their June 9-10 policy meeting, Federal Reserve officials said that there remains “an extraordinary amount of uncertainty and considerable risks to the economic outlook,” according to minutes released yesterday. Many “judged that there was a substantial likelihood of additional waves of outbreaks, which, in some scenarios, could result in further economic disruptions and possibly a protracted period of reduced economic activity” and noted that “fiscal support for households, businesses, and state and local governments might prove to be insufficient.”

Current data on U.S. economic activity shows a challenging environment as coronavirus outbreaks swell in California, Texas, and Arizona, contradicting earlier data that seemed to point to a V-shaped recovery. Many states, including New York and Kansas, have halted aspects of their re-openings in response to the new clusters.

“I think we’re going to be very good with the coronavirus. I think that at some point, that’s going to sort of just disappear, I hope,” U.S. President Donald Trump told Fox Business in a July 1 interview.

Although the country is “amid signs the worst of the recession is behind us,” S&P Global Ratings now projects the world’s biggest economy to contract 5% this year, shrinking a shocking annualized 33.6% in the second quarter. The likelihood is that the country won’t return to pre-pandemic output levels until the latter half of next year.

“If containment takes twice as long as expected, the corresponding economic damage will be more than twice as bad—and, therefore, the recovery could take longer and be weaker than initially projected,” S&P Global Ratings said.

Today is Thursday, July 2, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

COVID-19 Will Shape The Future Of Consumer Goods

A large chunk of consumption has shifted from outside to inside the home under coronavirus lockdowns and social distancing. S&P Global Ratings examines these trends and what they mean for the consumer goods sector, highlighting several new facets that are likely to shape credit quality. For starters, packaged foods and home care businesses should continue to see healthy demand. On the flip side, demand for personal luxury goods and parts of the beauty segment are not expected to pick up significantly. We believe the pandemic will accelerate the shift to e-commerce, but a step change will mean greater collaboration in the areas of branding and distribution between consumer product companies and retailers. Global supply chains have proven to be complex and fragile, which should prompt strategic but only gradual changes.

—Read the full report from S&P Global Ratings

China's auto sales rebound may be short-lived

Despite encouraging signs in recent months, China's automotive industry remains set for its third consecutive year of decline in 2020 as the boost from pent-up demand and generous incentives will likely lose steam in the second half, industry observers warned. The coronavirus pandemic prompted a 42.4% year-over-year sales slump from January through March as dealerships were shuttered and citizens remained under lockdown. Still, demand has returned since with sales rising 4.4% year over year in April and 14.5% in May, according to data from the China Association of Automobile Manufacturers, or CAAM.

—Read the full article from S&P Global Market Intelligence

Automakers limp out of worst quarter in living memory

Three analysts interviewed by S&P Global Market Intelligence said the three-month period to June 30, during which the bulk of global auto manufacturing and retail was shuttered amid coronavirus lockdowns, was the most devastating they had witnessed in their career. Of the major automakers with a global presence, analyst polls by S&P Global Market Intelligence show that only South Korea's Hyundai Motor Co. and Kia Motors Corp. are expected to report an operating profit.

—Read the full article from S&P Global Market Intelligence

Suburban office campuses gaining appeal in social distancing age

The age of social distancing may also come to be known as the beginning of a suburban revival in the U.S. office market. In California's Bay Area, the epicenter of high tech in the U.S. and home to some of the nation's priciest office real estate, suburban Silicon Valley may bounce back before San Francisco, its urban sister to the north. Experts said the Silicon Valley office market could even benefit from the economic dislocation. The relative appeal of the two markets, which share similar tenant orientations and are separated only by a short drive down the San Francisco peninsula, illustrates shifting real estate priorities in the age of the coronavirus and hints at potential long-term changes in office demand.

—Read the full article from S&P Global Market Intelligence

Banking Sector Under Pressure

As Q2 closes, US bank loan balances slump

With data available through most of June, balance sheet themes for U.S. banks in the second quarter appear mostly in place. A surge in lending that started in March has started to reverse sharply as corporations pay down credit lines, borrowing under the government's small-business relief program tapers and banks tighten underwriting. Deposits continue to pile up as businesses and consumers maintain large, precautionary balances and as bond buying by the Federal Reserve floods the system with cash. For bank net interest margins, that translates into a "tug of war" between lower-yielding liquid assets and easing funding costs, Compass Point analyst David Rochester wrote in a June 26 note.

—Read the full article from S&P Global Market Intelligence

US banks cut energy borrowers' credit lines as oil prices remain low

With oil prices below break-even levels for some drillers, banks are cutting credit lines and looking to diversify away from the sector. Oil collapsed in April, with futures briefly entering negative territory. While there has been some recovery, oil continues to trade at roughly $40 a barrel, which is lower than many operators need to turn a profit. U.S. banks have responded by reconsidering their energy portfolios, tightening underwriting on new credits and using the spring redetermination process to reduce credit lines for many existing energy borrowers.

—Read the full article from S&P Global Market Intelligence

Fed officials question necessity of yield curve caps, worry over more outbreaks

Federal Reserve officials have "many questions" about whether capping parts of the yield curve is necessary in the U.S., but agree that they need to study the issue further, minutes of the central bank's June 9-10 meeting showed. The minutes also revealed that a number of Fed officials worried three weeks ago about the potential for new coronavirus case outbreaks in the U.S. as states started to reopen their economies, a trend that appears to be playing out amid the recent resurgence of cases.

—Read the full article from S&P Global Market Intelligence

The Future of Energy and Commodities

Mexico gas imports test record highs fueled by summer heat, downstream openings

Mexico's gas imports from the US are poised to hit record highs in the weeks ahead, propelled by rising summer temperatures and potentially by an imminent opening in new downstream demand. In late June, exports twice surged to new record highs at over 6 Bcf/d. While record regional demand from northern Mexico last month coupled with hotter weather to lift Mexico's baseline demand for US gas, the new single-day records appear to have been driven by increasingly frequent negative pipeline imbalances, data from S&P Global Platts Analytics shows.

—Read the full article from S&P Global Platts

INTERVIEW: Momentum in LNG shipping will build post-pandemic, says industry head

LNG is creating its own momentum as a credible shipping fuel with infrastructure developing well and uptake is likely to resume where it left off after the global COVID-19 pandemic eases, according to SEA-LNG chairman Peter Keller. EA-LNG is an industry group that brings together key players in the LNG maritime value chain. "As soon as the shipping industry gets its feet back on the ground, which may take a while, a few years, the emphasis on environmental stewardship and reduction of greenhouse gases will certainly continue," Keller told S&P Global Platts in an interview on June 26.

—Read the full article from S&P Global Platts

DOE backs governmental push for fossil energy, manufacturing in Appalachia

A US Department of Energy report encourages continued government intervention to help attract private investment into energy production and manufacturing in the Appalachian region. Few other regions have the potential for new growth "at a scale not seen since the Industrial Revolution," the DOE said in the report, released June 30. It casts Appalachian economic viability during the recovery from economic slump associated with the coronavirus pandemic as a key indicator for prospects for overall US economy.

—Read the full article from S&P Global Platts

Saudi money, US pressure coaxes Iraq on OPEC oil cut compliance

After years of dragging its feet on complying with OPEC oil production quotas, Iraq has taken its biggest steps towards implementing its agreed output cuts, as a campaign of financial sweeteners and diplomatic pressure from Saudi Arabia and the US appears to be paying off. The new government in Baghdad led by Prime Minister Mustafa al-Kadhimi has in recent weeks ordered drastic reductions in crude exports and agreed to compensate for months of overproduction. The change in sentiment coincides with the offer of financial assistance from Riyadh to help Kadhimi's impoverished government and a diplomatic push from the US, where President Donald Trump's administration has made reviving oil prices a priority.

—Read the full article from S&P Global Platts

Listen: Is the slump in European steel demand here to stay?

S&P Global Platts managing editor Laura Varriale talks to steel news editor Annalisa Villa and pricing specialists Amanda Flint and Len Griffin about the state of the European steel industry after lockdowns start to ease across mainland Europe, sparking hope for more industry activity.

—Listen to Commodities Focus, a podcast from S&P Global Platts

Written and compiled by Molly Mintz.